The Delaware Chancery Court recently decided two different motions for preliminary injunctions, with vastly different results. In both cases, the issue was whether disclosures in the respective proxy statements were sufficient to enable stockholders to consider fairly a proposed merger. In Wayne County Employees’ Retirement System v. Corti, C.A. No. 3534-CC (Del. Ch. July 1, 2008), Chancellor Chandler denied plaintiff’s motion for a preliminary injunction to halt a special meeting of stockholders based upon inadequate proxy statement disclosures. In David P. Simonetti Rollover IRA v. Margolis, C.A. No. 3694-VCN (Del. Ch. June 27, 2008), Vice Chancellor Noble granted a preliminary injunction based on inadequate disclosures in the challenged proxy statement. These two decisions, issued just days apart, provide further guidance to practitioners regarding the materiality of information to be included in proxy statements.
Wayne County Employees’ Retirement System v. Corti
In this case, the plaintiff stockholder sought a preliminary injunction to stop a special meeting of Activision, Inc. stockholders to approve a proposed merger with a video gaming subsidiary of Vivendi, Vivendi Games. Plaintiff argued that there were three allegedly “material” omissions from Activision’s proxy statement. The court rejected each argument.
First, plaintiff argued that Activision should have disclosed the current internal projections for Vivendi Games because the Activision board relied on those projections at its April 29, 2008 meeting. The court rejected this argument, noting “[f]rankly” that “not every document reviewed by the board is material.” Plaintiff failed to demonstrate that the requested projections were material, such that they would “significantly alter the total mix of information already provided.” Because plaintiff’s own papers acknowledged that the current projections demonstrated that Vivendi Games had “generally kept in line” with the estimates that were relied upon by the board and disclosed in the proxy statement, the court questioned how additional projections would significantly alter the total mix of information for the stockholders.
Second, plaintiff argued that Activision should have disclosed its reasoning for deciding to continue its recommendation at the April 29, 2008 board meeting. At oral argument, plaintiff conceded that this second alleged material omission was merely a reiteration of its first alleged omission. However, to the extent that plaintiff requested that the board offer some sort of justification for its decision, the court did not agree with the contention that a further post hoc justification would assume actual significance in the deliberations of a reasonable stockholder.
Third, and finally, plaintiff argued that Activision should have disclosed information about a November 2007 price renegotiation and why the board did not renegotiate the fixed ratio between the values of the two merging companies. The court noted that the fact that the increase in the per share valuation of Activision led to a corresponding increase of over $1 billion in the implied value of Vivendi Games would not alter the total mix of information already available. As the court explained, “[t]he definitive proxy already discloses the fixed ratio; a middle school algebra student could plug in the numbers and determine precisely how the November 2007 increase in Activision’s valuation affected the implied value of [Vivendi] Games.” In so holding, the court noted that “[w]hile it might be helpful if [Activision] did the math for the shareholders, ‘[o]mitted facts are not material simply because they might be helpful.’”
Because plaintiff failed to demonstrate a likelihood of success on the merits of its disclosure claim, it was, in the words of Chancellor Chandler, “GAME OVER” for plaintiff — and a victory for Activision.
David P. Simonetti Rollover IRA v. Margolis
In this case, the plaintiff shareholder sought a preliminary injunction to stop a proposed merger whereby Apax Partners, L.P., and affiliated entities would acquire The TriZetto Group, Inc. Plaintiff alleged various omissions from the proxy statement to justify its motion for a preliminary injunction. Vice Chancellor Noble held that one such alleged omission was sufficiently material to justify granting the preliminary injunction. The omission concerned UBS Investment Bank (“UBS”), TriZetto’s financial advisor and author of the fairness opinion, and the nature and amount of UBS’s interest in the success of the merger. The proxy statement made various disclosures regarding UBS’s interest in the merger. Most notably, it disclosed that TriZetto would pay UBS a fee of approximately $11.3 million, a significant portion of which was contingent on the merger’s closing. The proxy statement also disclosed the fact that, as of the date of UBS’s opinion, UBS and its affiliates held warrants to acquire TriZetto common stock as well as convertible notes of TriZetto, and that upon consummation of the merger, UBS would be entitled to receive cancellation payments relating to the warrants, as well as the conversation value and certain make-whole payments relating to the notes.
The court agreed with plaintiff’s contention that the value of the warrants and notes should have been quantified and disclosed in the proxy statement. In doing so, the court noted that the opinion of financial fairness for a proposed merger is “one of the most important process-based underpinnings of a board’s recommendation of a transaction to its stockholders” and for the stockholders’ decisions on the appropriateness of the transaction. Thus, the court held, “it is imperative for the stockholders to be able to understand what factors might influence the financial advisor’s analytical efforts. . . . It is not simply the magnitude of UBS’s [note and warrant] holdings, but how those obligations will be treated as a result of the [m]erger.”
Defendants argued that the value of UBS’s notes and warrants was not currently quantifiable because their value was dependent on several factors that could only be determined after the merger. The court recognized that quantification in the form of a range of values would be acceptable, but nevertheless held that, in this instance, quantification was required for full and complete disclosure.
These two Delaware Chancery Court decisions reaffirm the general principle that a preliminary injunction premised upon alleged inadequate proxy statement disclosures is very difficult to obtain. Although courts generally view with skepticism claims of inadequate proxy disclosure, they also recognize the importance of adequate disclosure of a financial advisor’s interest in the proposed transaction and will, in certain cases, require additional disclosures before permitting a stockholder vote to proceed